Balanced Funds

Balanced funds, also known as hybrid or blended funds, are types of mutual funds that own both stocks and bonds. This type of mutual fund provides investors with a balanced portfolio of stocks and bonds in a single mutual fund. Typically, stocks comprise 50% to 70% of a balanced mutual fund’s portfolio, with bonds accounting for the rest in balanced funds. The main aim of these types of mutual funds is to balance the risk-reward ratio of investors and optimise the returns on the balanced mutual fund investment.

Investing in balanced mutual funds offers investors the chance to diversify their portfolio as the funds involved in balanced funds invest in various instruments across equity and debt assets. Thus, balanced mutual funds benefit those who like some kind of risk in investment but not too much. Or put simply, balanced funds are ideal for someone looking for capital appreciation at minimum risk.

Purpose of a Balanced Mutual Fund

The primary purpose of balanced mutual funds is to provide investors with some stability, or as the name suggests, a balance between capital appreciation and risks. An equity investment fund consists of almost 85% of the assets involved in equity or stock. On the other hand, debt funds also involve a similar percentage of assets invested in fixed-income tools and bonds. As a result, the investment type may not suit every kind of investor. This is where balanced mutual funds come into play.

Instead of risking all the money in equity, balanced funds help investors to invest prudently with a lower risk. By its meaning, a balanced mutual fund can be both equity-oriented and debt oriented. Balanced mutual funds are best for individuals with no source of income to create a steady income flow and generate enough capital to pay for their necessities. Thus, balanced mutual funds aim to strike a balance between equity and debt that help an investor diversify their portfolio with minimal risk.

Taxability of Balanced Funds

The tax implications of the top balanced funds are taxed based on the orientation of the fund. Equity-oriented funds have at least 65% of their corpus invested in stocks, and they are taxed just like pure equity. This means that if you hold the investment for more than a year, the capital gains are treated as long-term capital gains or LTCG. LTCGs over INR 1 lakh on equity-oriented funds are taxed at the rate of 10% without the benefit of indexation. Short-term capital gains or STCGs on equity components are taxed at the rate of 15%.

Similarly, the debt-oriented funds of balanced funds are taxed just like debt funds. If the investor holds the investment for more than three years, the capital gains are termed short-term and taxed at normal rates. But if the investment holding period exceeds three years, then the gains are termed as long-term and are taxed at 20% after the indexation benefit, which significantly reduces the tax.

Who should Invest in Balanced Funds?

Balanced hybrid funds are ideal for a medium-term horizon and are ideal for investors who are looking for a blend of safety, income and modest capital gains. Usually, other mutual funds change their asset allocation according to the dynamic economic conditions. However, balanced mutual funds strictly behave in line with their orientation, i.e., less than or equal to 65% as prescribed in the investment mandate. During the bull runs, the funds will be able to generate better returns, while during the bear runs, the debt component will be able to provide a cushion to prevent erosion of fund returns.

Investors with dual investment objectives prefer balanced hybrid funds to earn inflation-beating returns. This is one of the best advantages of balanced mutual funds. Typically, retired people or investors with low-risk tolerance prefer balanced funds for a steady income flow that can supplement their current needs. Equities involved in balanced funds prevent erosion of purchasing power and help investors ensure the long-term preservation of retirement corpus.

Top Advantages of Balanced Mutual Funds

There are several advantages of balanced funds for investors. The top advantages include:

Risk Reduction

Investments done in equity markets pose high risks. On the other hand, the debt markets involve low risk. Hence, investments made through balanced mutual funds offer instant diversification and risk-adjusted returns in such a scenario.

Diversified Portfolio

Balanced funds are excellent for investors who want to diversify their portfolios. Investing in balanced funds is one of the best advantages, as the investment tool gives investors diversification in the form of a single fund. With only one investment, investors can have a diversified portfolio with dozens of equities and bonds.

Protection from Inflation

A portion of balanced mutual funds is invested in debt assets which can provide a hedge against inflation, primarily if the funds are invested in foreign bonds. Thus, balanced funds can protect investors from inflation by giving them access to countries that have not been affected by it.

Re-Balancing of Funds

There are times when the debt market is overvalued than the equity market and vice versa. In such situations, investors have the liberty to shift between the two major asset classes to protect the fund’s performance from market fluctuations.

Tax Benefits

Ideally, if investors try to move their assets from equity to debt, they are subject to tax liabilities. But in the case of balanced funds, the fund managers have the advantage of switching between debt and equity without presenting the investors with tax liabilities.